Education costs double in 6 years: Here's how you can invest for your child

Saving for children’s future is among the top aspirations for many Indians,  as per the annual BankBazaar Aspiration Index study but with while consumer price inflation has been around 6% over the last decade, inflation in education is seen to be around 11-12 per cent. This means that education costs could double every six to seven years. Hence , it is imperative to invest in a way that helps parents beat education inflation,  which is seen to be at twice the rate of CPI in the long-run. 

For instance, a four-year Bachelor of Technology course at a private Indian university is priced at Rs 10 lakh, while a Bachelor of Medicine and Surgery (MBBS) course at Rs 50 lakh, approximately. If your child wishes to pursue graduate studies abroad, it could easily set you back by Rs 1 crore or more.

Education inflation refers to the rising costs of education over time.

BankBazaar explains this with the costs of the two-year MBA program at a premier business school.

If we assume the inflation to be 11% for the future, here's what the same program would cost in the years to come.

So, where should one invest to beat education inflation? "An investment that beats inflation, helps you hit your goal, is tax-efficient, and provides liquidity when required is your best bet. Backing the wrong investment would mean losing time and missing your goal by a wide margin," noted the study.

Comparison of life insurance-linked investment plan vs equity MF investment


Assume that your investment plan needs an investment of Rs 1 lakh per annum for 20 years. In the fifteenth and sixteenth year, you get cashback of Rs 2 lakh a year. In the next four years, the cashback becomes Rs 3 lakh.

The plan pays a total cashback of Rs 16 lakh. Cashback plans, also called moneyback plans, are life insurance-linked investment plans. They periodically pay back an assured sum of money. In a child plan, the cashback schedule may be linked to the various stages of a child’s education, typically from high school to a master’s degree. In the twenty-first year, the policy matures, and you get Rs 20 lakh plus accrued bonuses, apart from the Rs 16 lakh already paid as cashback.

On a total investment of Rs 20 lakh, the plan returns Rs 36 lakh in multiple instalments, allowing you to finance the different stages of your child’s education.

But what about the annual rate of return on this investment?

Using the numbers above, the BankBazaar study benchamarked the investment returns against the minimum returns provided by any equity MF. In a 20-year period ending on 1 November 2021, the minimum returns provided by any equity fund was 12.75 per cent per annum.

Assume you invested Rs 1 lakh a year in this plan for 20 years. You also withdrew Rs 2 lakh in the fifteenth and sixteenth years and Rs 3 lakh in the next four years.

Despite the withdrawals of Rs 16 lakh in tranches and the bare minimum rate of return, you would still be left with around Rs 67 lakh at the end of 20 years—more than three times of what the aforementioned child plan was returning.

"On the child plan, the annual rate of return works out to approximately 6 per cent if you are left with just Rs 20 lakh and bonuses. The returns are lower than that of EPF today, which would have left you with around Rs 33 lakh in 20 years... Assured returns, while reassuring, may prove too low for the goal that you are investing for. In the above case, your investment returns were approximately 6 per cent, while education inflation is in double digits," said Adhil Shetty, CEO of BankBazaar.

But assured saving plans give tax benefits too?

Investing in an assured savings plan has its benefits, such as guaranteed returns, tax benefits etc. However, it also comes with limitations, including potentially lower returns compared to equity, lack of flexibility, and inflation risk.

"The idea that makes most sense to me is that one should separate life insurance and investment. This would help one achieve both targets. Mixing the two is a bad idea. Here’s what I’m currently doing for my daughter’s education. I have term coverage to cover a loss of income. This takes care of my family’s life insurance needs.

Parameters you should take into account while investing for your child's education:

 It is important to strategise your investments in a way that they align with your child's education goals.

When choosing investments, consider things like the approximate expense you are looking to fund, education inflation, and the time you have to arrange for the required funds. To choose the right investment, assess them based their annual return rate, taxation, liquidity, premature withdrawal charges, and most importantly, for inflation-beating returns.

"A balanced mix of mutual funds and government schemes can fetch you the returns you may be aiming for, along with tax benefits, and liquidity," said Shetty.
Pick active MFs or even ELSS if you have high risk tolerance

For my daughter’s education, I’m investing in index funds such as Nifty50 and Sensex. We’ve seen that these indices have delivered around 12% returns per annum over the long-term. You can also pick in active mutual funds – even ELSS – if you have higher risk tolerance. If you’re averse to stock markets, consider Sukanya Samridhi Yojana and provident fund," said Shetty. 

Any debt investment is unlikely to keep pace with education inflation

 Therefore, to hit your target with debt investing, you’ll need to invest larger sums of money compared to inflation-beating equity instruments. Ideally, invest in a sensible mix of both as per your needs.

Another pro tip: With time, your goals may change, which is why it’s important to review your investments and adjust them accordingly. If you find that your investments are not offering the returns you expected them to, explore and shift to other instruments that do.